2017-05-17

Pop Goes the Ponzi: Rumors Foresea Life Insurance In Trouble

A leaked document circulating on the Chinese Internet shows one of China's most aggressive sellers of universal life insurance is in trouble. Foresea Life was selling policies like hotcakes in order to fund parent Baoneng's takeover attempt of Vanke. The chairman of Baoneng was banned from the insurance industry for 10 years, and now the insurance division might be facing a Ponzi-collapse if it cannot sell enough new policies to meet the cash demand from a ballooning amount of surrendered policies. Last year, policies surrendered totaled 9 billion, an increase of 5.2 times. This year, the 2017 estimated surrender value (estimated by Foresea) is 60 billion, an increase of 6.7 times.

Universal life insurance is one such policy, commonly offering 5-6% annual return. Players like Evergrande Life even offer 8%.

And such policies have been funding unlisted insurers to buy mainland China's A-shares. Qianhai Life Insurance of Baoneng Group has been issuing these "life insurance" policies to fund its purchase of China Vanke's (200002.China) shares.

Anbang’s premiums from investment products reached 186.9 billion yuan, a 271 per cent year rise on the previous year. Evergrande Life Insurance’s investment premiums swelled 705 per cent to 23 billion yuan while that for Qianhai Life surged 228 per cent to 50.1 billion yuan, according to calculation by SWS Research.

If insurers use cash collected from universal life products to buy shares in listed companies, they have to issue the products continuously to maintain cash levels, because many buyers surrender them within three years, Li from CMS said.

China’s fourth-richest man has been banned from the country’s insurance industry for 10 years, in the most aggressive move yet by regulators to tame borrowing and hostile corporate takeovers by insurers.

Local Chinese media and Britain's Financial Times, citing a letter sent from Foresea Life to China's insurance regulator, said the insurer may be unable to meet payouts if it was unable to sell new products.

The letter from Foresea Life, dated April 28, requested the China Insurance Regulatory Commission (CIRC) to resume new product approvals to "avoid inciting mass incidents by clients and localise and systemic risks", the Financial Times said.

One of China’s largest insurers has warned of mass defaults and social unrest unless the regulator lifts a ban on its issuance of new products, the latest sign of stress in the industry caused by a crackdown on financial risk.

In a letter to China’s insurance regulator seen by the Financial Times, Foresea Life Insurance warns that the company expects Rmb60bn ($8.7bn) in redemptions this year and might be unable to meet payouts unless it is able to sell new products.

In December, the China Insurance Regulatory Commission banned Foresea for three months from applying to sell new products. In February, the agency banned Foresea chairman Yao Zhenhua, China’s fourth-richest man, from the industry for 10 years.

In the letter dated April 28, Foresea asks the CIRC to resume new product approvals “in order to avoid inciting mass incidents by clients and localised and systemic risks, producing greater damage to the industry”. The term “mass incidents” is commonly used in China to describe demonstrations, protests and riots.

Recently, screenshots of documents relating to Qianhai cash flow and surrender pressure spread on the Internet, including the "Shenzhen Insurance Regulatory Bureau recommended paying attention to Qianhai cash flow risk", "on the request to support the normal operation of Qianhai and related matters Of the report" and so on.

The above mentioned documents, Qianhai, said, "In 2017 our company is expected to have 60 billion yuan in surrendered policies," and asked the CIRC within a certain amount of sales within the scope of the resumption of universal business sales and new product declaration. In addition, the document also pointed out that the Qianhai risk of cash flow, the first quarter of this year, the company's cash inflows substantially reduced. However, the authenticity of the above documents, the reporter did not from the CIRC and Qianhai to be confirmed.

According to the iFeng article, 78 percent of Foresea's (Qianhai in pinyin) premiums came from sales of universal life policies back in 2015. It saw 60 billion in investment inflows thanks to those policies. Business has since slowed, although some don't see a big risk.

After the suspension of the Universal Insurance business, according to the recently released data, the former life insurance in the first quarter of 2017, the original insurance premium income of 13.48 billion yuan, compared with 11.89 billion yuan in 2016 increased, while the new investment To 46.78 million yuan, compared with 33.46 billion yuan last year.

According to the solvency report, at the end of the first quarter of 2017, the net cash flow of Qianhai Life was -12.4 billion yuan, the consolidated current ratio was 198% in one year and the liquidity coverage rate was 257%. At the end of the first quarter of 2016, the net cash flow was 8 billion yuan.

People close to Qianhai said that the 2016 annual report shows that as of the end of the year, Qianhai had cash and cash equivalents balance of 43.66 billion yuan, plus the first quarter of 2017 scale premium income of 13.5 billion yuan, Qianhai to achieve annual cash net inflow is not stressful.

Assuming the document is real, we now know why regulators and the central bank suddenly eased their stance on deleveraging last week. The problem is that, as Mises said so many years ago:

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.